blockchain is eating software, the internet, data and the world.

​and it's hungry for seconds.

The cryptocurrency market is a prime targets for broker-dealer regulation.

Brokers and dealers are people or businesses that are in the business of buying and selling securities. The formal definitions are below, but, in essence, a broker is an entity like E*Trade that acts as an intermediary between buyers and sellers. You want to buy, say, Tesla stock, so you go on E*Trade, place an order, and E*Trade finds someone selling it. This is the most traditional instance of a broker-dealer.

The "less" traditional type of broker-dealer happens when a company is selling its own securities. If it's not an IPO, the company will want to promote the fact it's selling it's securities. It could hire a third party marketing agency that would go out and promote . . . but that would make the marketing agency "in the business" of buying/selling securities, even if it's not doing any buying or selling. It's still making those transactions happens, so the marketing agency would be a broker-dealer. So anyone a company has promote its securities would count as a broker-dealer.

Broker-Dealer Requirements

As a general rule, brokers and dealers are required to register with the SEC and joint a self-regulatory organization (“SRO”). The main US SRO is the Financial Industry Regulatory Authority (“FINRA”). There may also be state registration requirements, depending on your state.

If you act as a broker-dealer without properly registering, the SEC or state securities regulators can seek significant monetary penalties and/or criminal sanctions. Also, they may require rescission (basically, an undoing of the investment).

Why Broker-Dealer Laws Matter for Crypto

Given Chairman Jay Clayton of the Securities & Exchange Commission’s (“SEC”) recent aggressive view that “every ICO I’ve seen is a security,” these broker-dealer laws (“B-D laws”) will apply to most cryptocurrencies, whether utility or not.

Remember how a marketing agency that promotes a securities issuing would be a broker-dealer?

Replace "securities issuing" with ICO.

Now think of all the ads, tweets, emails, shills, etc. you have received and seen promoting ICOs.

*cough* John McAfee *cough*

Yeah . . . kind of a potentially big problem for crypto.

Don't worry, McAfee's days are probably numbered.

Broker-Dealers, Defined​First off, remember that the SEC is viewing most crypto as securities. So when you see the word “security,” it would apply to a crypto or ICO that's being shilled.The Securities Exchange Act defines “broker” as any person:

Engaged in the business of effecting transactions in securities

For the account of others.

Dealer is defined as any person:

Engaged in the business of buying and selling securities

For his or her own account

Through a broker or otherwise.

The key difference is that brokers buy and sell securities for others, while dealers do so for themselves.Note that these definitions are really broad. You don’t have to be involved in the actual purchase or sale of a security, you just have be involved somehow. This can mean you promoted the security (read: ICO) or introduced the issuer to an investor.The “Finder” ExceptionThe most cited exception to B-D registration is for a "finder," which is someone that finds investors or makes referrals. However, this is a very narrow exception. If a person has helped effect any securities (again, read: ICO) transaction more than once, this exception probably won't apply.

The main factors in determining if someone is a “finder” or “broker-dealer” are:

Regularity - Do they regularly participate in effecting securities transactions (broker)? Or was it a once-off, isolated event (finder)?

Participation - Do they participate in any solicitation, negotiation, and/or execution of the securities transactions (broker)? Or are they absent from the “substance” of the deal (finder)?

Compensation - Is compensation related to the outcome or size of the transaction/deal (broker)? Or was it a one-time flat fee (finder)?

Handling Securities - Do they handle securities (ICOs) or funds of those involved in the transaction (broker)? Or do they have no control and interaction with the assets/funds (finder)?

The determination is made on a case-by-case basis, and if any of the factors weigh in favor of being a broker . . . you’re probably a broker. Again, circumventing B-D laws is not easy; these laws are meant to apply to a lot of situations.Other ExclusionsThere are a few other exclusions from this requirement to register. The most relevant for crypto are:

Associated Persons – This is for employees, independent contractors, and the like that are working for a registered-broker, if they are properly supervised. They may have to register with an SRO, though, and this exemption only covers the person's activities in their capacity as an agent for the registered broker-dealer.

Issuer Exemption – Issuers that only buy/sell their own securities are not broker-dealers and do not need to register.

Associates Persons of the Issuer – Associated Persons of an issuer (employee, contractors, agents, etc.) don’t have to register if they: (1) aren’t statutorily disqualified (e.g., violated securities laws in the past in a way that they are now barred from broker-dealer activities); (2) aren’t paid on commission or similar transaction basis; (3) are not an associated person of a broker or dealer; and (4) limit their sales to certain, specified activities (e.g., only sell to registered broker-dealers, insurance companies, and certain other buyers).

Foreign Broker-Dealer Exemption – Broker-dealers that are not physically located in the US, and do not try to induce any securities transactions in the US are exempt.

Best OptionsThe most common way to be compliant with B-D laws is to hire someone as an employee, and pay them on a fixed, regular basis. That way they'll fit in the "associated persons of the issuer" exemption from registration.

Often, these employment arrangements include bonuses. Whether this is transaction-based compensation that would trigger B-D registration depends on the circumstances, but it generally should not be tied to how much “business” an ICO promoter brings in. Key features include:

When it’s paid (e.g., regularly vs. only after an investor is brought in);

When it’s determined it’s paid (e.g., at quarterly meetings vs. only after an investor is brought in),

When the person is informed of the bonus (e.g., at the end of a quarter vs. right after an investor is brought in), and

Whether the bonus varies and correlates with the person’s success in bringing in investors.

But Seriously, Consult Legal CounselB-D activities have serious repercussions if handled incorrectly, and the exceptions are narrow. This is an area of law where anyone that does any investing-related activities should talk to a lawyer.

It's interesting to learn about this. I didn't realize that brokers and dealers need to be registered with the SEC and things. That makes me feel more comfortable with them because it means they're trained and experienced, I would think.

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